What to do with an old 401(k): your 4 options
When you leave a job, you generally have four choices for the money in that employer's 401(k). Each has trade-offs.
1. Leave it in the old plan
Pros: no action needed; large plans often have low-cost institutional funds; 401(k)s have strong federal creditor protection. Cons: one more account to track; you're limited to that plan's menu; small balances (often under $7,000) may be moved out by the plan.
2. Move it into your new employer's plan
Pros: keeps everything in one place; may allow penalty-free withdrawals if you leave that job in or after the year you turn 55; can keep IRA balances clear for "backdoor" Roth contributions. Cons: only possible if the new plan accepts roll-ins; you're tied to its menu and fees.
3. Roll it to an IRA
Pros: nearly unlimited fund choice; you pick the provider and costs; easy to consolidate several old plans. Cons: creditor protection can differ by state; a pre-tax IRA balance complicates backdoor Roth contributions; some providers or advisers charge more than your plan did. A direct (trustee-to-trustee) rollover avoids mandatory tax withholding.
4. Cash it out
Pros: immediate access to the money. Cons: pre-tax amounts are taxed as income, and before age 59½ there is usually an extra 10% penalty; the plan typically withholds 20% for taxes; you lose future tax-deferred growth.
Things to check either way
- Fees and fund expense ratios in the old plan versus the alternative
- Any company stock in the plan (special tax rules, called NUA, may apply)
- Outstanding 401(k) loans, which may become due when you leave
- Roth vs pre-tax money, which should stay in matching account types
Rules change and have exceptions. Check current IRS guidance or a qualified professional before moving money.